A conversation with the former New York governor about his new book, Government's Place in the Market

Reuters/Brendan McDermid

For decades, the New York Attorney General's office gave Wall Street a
free pass. In unspoken deference to the financial industry's power,
prestige, and influence, state regulators left Wall Street to the
SEC—even though Manhattan's financial giants reside within the state
Attorney General's jurisdiction.

On April 8th, 2002, New York's then-AG Eliot Spitzer shattered precedent by bringing a fraud case against Merrill Lynch. Calling for broad reform throughout the financial services industry, he alleged that the broker fostered dangerous conflicts of interest and
intentionally misled its investors for profit. In the Merrill suit, and
subsequent cases, the Spitzer administration invoked a forgotten 1921
state statute called the Martin Act, which gives the Attorney General
wide latitude to regulate and prosecute consumer fraud cases. By late
2002, when 60 Minutes ran a laudatory profile that dubbed Spitzer "The Sheriff of Wall Street," a star had been born.

As everyone knows, Spitzer's fortunes have changed since then. His
political future is, at best, uncertain. But his regulatory career will
continue to serve him well: The practices he decried during his
tenure—subprime loans, predatory lending, conflicts of interest—are the
same misdeeds that sparked 2008's financial meltdown.

In a new book, Government's Place in the Market, Spitzer returns to the full-bore Goliath-toppling mode that made him famous. Part of the Boston Review Books series of monographs published by MIT Press, the short, urgent volume is Spitzer's Common Sense.
Regulation, he argues, is not the enemy of the market—in fact, he
claims government enforcement is crucial to industry and commerce.
Without stern enforcement, profit models make unethical and
anti-competitive practices inevitable; in Spitzer's view, strong
government standards protect the common good, preserve competition, and
help keep the market stable, dynamic, and solvent.

Eliot Spitzer called me from his office at CNN's newsroom in New York, where his cable talk show, In the Arena,
is broadcast. We discussed the central themes of his book, his
prescience regarding Wall Street malfeasance, and the ongoing regulatory
challenges in today's marketplace.

Your book
argues that government and markets should not be placed in diametric
opposition. Instead, you say, government has a key place in healthy
market systems. Why do markets need government regulation to succeed?

In
the absence of rulemaking and enforcement by government, private actors
ultimately will not abide by rules and behavior that generate the fair
and open competition that is the essence of capitalism. Capitalism, like
a contest played on a football field, only works if certain behavioral
patterns are observed and the private actors who participate in the
marketplace do not, in and of themselves, enforce those rules. In the
absence of enforcement, behavior descends to a lowest common denominator
that is simply unacceptable and, in the long run, very
counterproductive to society. To a certain extent, the cataclysm of 2008
is evidence of that fact.

But most free market
economists argue that the market has the power to regulate itself. Why,
in your view, is this not the case?

This claim shows
the underlying flaw in their intellectual and practical understanding of
the world. Intellectually, I do explain in the book why they're wrong
and I think necessary at this point in time to say, "Hey guys, take a
look at where you're going to get us." The intellectual purity of their
argument belies the practical consequences of applying their theory to
the real world.

Alan Greenspan's blind acquiescence
to pseudo-libertarian theory created havoc and harm, the likes of which
we hadn't seen in 60 or 70 years. The fact that people continue to
subscribe to that theory surprises me, given how counterfactual it is.
The simple reality is that entities like Goldman Sachs or Lehman Bros
have failed to either regulate themselves or abide by fundamental rules
of ethics. This should be sufficient to persuade people that you need
enforcers in the marketplace to impose certain simple rules of
transparency and integrity.

When Goldman decided in
December of '06 to take a very significant short position in the
mortgage market, understanding—as they did—that things were going to
collapse, did they, in any way, shape, or form, pick up a phone to a
regulator, the Fed, the treasury, the OCC? Did they say, "You know what?
There's a societal problem here. There's an overhang, and we have to
deal with it"? Did they pick up the phone to their colleagues in the
marketplace and say, "Hey guys, we're responsible for regulating
ourselves in this political environment—that's what we asked for and now
we have to do it." No, they did not speak up. They simply figured out
how to make money on the deal. And then they had to be bailed out with
our tax dollars. It's one of the most grotesque violations of
public-spiritedness that I've ever seen. And I think Goldman deserves
all the condemnation it's now getting.

Some bankers and
business owners, when faced with deregulation, cite their belief in a
government that doesn't interfere with the free market. But don't many
of these same entities enjoy substantial benefits from government
intervention—Coca-Cola benefits from government subsidy of corn, for
example, or Goldman Sachs benefits from bailout money? Why does this
double-talk persist?

This is one of the most cynical
plays out there. Either they are ignorant and have no idea what the
market really is, which is the case for some of them—or, they're
cynically playing to the public's desire to create the marketplace that
they've described. They ask the public to put confidence in this
mythical marketplace where you don't need rules—until of course they
need a bailout, and then they beg and plead for, or demand, dollars. So
the hypocrisy of this knows no bounds and the cynicism also knows no
bounds.

Whose job was it, in your view, to prevent the financial calamity that came to a head in 2008?

The regulators who are being paid to
stop the sort of behavior that metastasized into the crisis. Having
said that, investment banks had created an intellectual environment
where libertarianism had become the flavor of the decade—or the flavor
of several decades, going back to President Reagan as the leading
politician that embraced this line of thought. It became the ideological
framework within which we operated for quite some period of time.

The investment banks helped create it, they politically lobbied for it,
they pushed back on Capitol Hill, and elsewhere, against any flex of
regulatory muscles. They came down very hard on those who did try to
enforce regulatory rules. All this leads to their shared culpability. So
there are multiple parties—but regulators, who at first issue have the
responsibility to stop the behavior, should have done much more.

As
Attorney General of New York, you brought suits against firms like
Merrill Lynch for engaging in predatory lending practices, and against
AIG for fraud. Some would argue you built your reputation on not being
afraid to pursue white-collar crime cases. Why are these types of suits
so rarely seen, why are convictions and regulatory overhaul so elusive,
when there's broad public support?

Well, here's the bizarre thing. You're right, now
the public looks kindly on those actions. But when I began to bring
those cases, people thought I was crazy. There was enormous pushback
within the world of politics, where people thought I was cutting my
throat politically—these are important institutions politically,
socially, in terms of the economy in many areas, certainly in New York
City. It was rattling the cage before it was obvious to most people that
we had a problem.

But, then and now, these are very
hard cases—they're not two-witness ID cases where you get two people to
point say "he did it" and you're done. It's not a whodunit. It's a much
more complicated task of explaining very difficult transactions, proving
intentions and states of mind that are often very subtle and subject to
contrary evidence. So nobody should underestimate the difficulty in
these cases. Bottom line is, more cases should be brought. I hope more
cases will be brought.

The MIT Press

So the attitude you encountered among prosecutors was, "Leave these guys alone and let them do their work?"

Many
prosecutors had bought into the ideological perspective that
prosecuting these cases was injurious to the marketplace. And that, I
think, is a fundamentally wrong perspective. But it was what was there
for quite some period of time.

I'm not sure I agree with your premise. I think that the vocabulary
is arcane. But the underlying impropriety is very simple. People get
what conflicts of interest are. People get that telling the public to
buy mortgage-back security at the same time you're betting against it,
creates a tension that's undeniably wrong. The underlying concepts that
have to be proven here are as simple as the concepts underlying fraud
cases that have been the bread and butter for prosecutors for
decades—even if the particular vocabulary on Wall Street is marginally
different. Prosecutors should explain these practices in a
straightforward way, and that's what good lawyers know how to do.

Your
book reports that, in 2004, you stated subprime loans "are foisted on
borrowers who have no realistic ability to repay them and who face the
loss of their hard-won home equity when the inevitable default and
foreclosure occurs." In what context did you say this?

That was an article in The New Republic,
and that was the one sentence where [co-author Andrew] Celli and I
really fulminated. The essay was an effort to create a larger
intellectual framework for what we were doing [in the Attorney General's
office]—the first sort of dim explanation of what became a slightly
more complete discussion of what government should be doing in
the marketplace. One of the lines of argument was that there are certain
core values the government needs to protect: we don't allow child
labor, for instance, not because child labor is inefficient—though it
is—but because it's wrong, and government needs to enforce it. Another
value we argued for is fairness, in terms of discrimination. And another
was subprime debt. We had brought a number of subprime cases and there
was enormous opposition to them. But we said, "This is what government
has got to do."

If you were able to put your finger on the problem in 2004...why was there so much surprise in 2008?

That's
a good question—I have no idea. We worked to try to pursue a lot of
these subprime lending cases and the FCC and the banks shut us down.
That was the case up in the Supreme Court, we didn't end up winning
until either 2008 or 2009, I can't remember which—I was out of office by
then. There was significant opposition. I don't know what I can tell
you—there was just huge conceptual opposition to what we were trying to
do.

In your book, you suggest that Wall Street knew the
government would bail them out; they knew that the taxpayer troughs
would hedge their risky bets. Why is this a fair assertion?

I
think you can look at the evidence and say it was all very predictable.
When the leaders of the major banks showed up and said cataclysm will
result of you don't write us a check, the check was written. There
wasn't even much of a negotiation. And let's be very clear: the check
had to be written—the question was what were the terms that were
attached to it? Not one of us says you should let Goldman, Citi, and
Meryl go bankrupt. That would have been a cataclysm—we can't even
imagine what might have happened. But there should have been some
serious negotiation about what the terms of the bailout would be, who
would have to accept responsibility, and what the new financial
structure would look like.

What do you make of the fact
that the government is urging for deep cuts to social programs, when
just two years ago, we gave trillions of dollars to banks? Or when we've
recently extended Bush-era tax cuts that predominately help the
wealthy?

The Bush tax cuts were wrong when enacted.
Those at the upper end of our income strata can and should pay more to
support a government that is right now being starved. Does that mean
that we shouldn't be reforming Medicare, Medicaid, and Social Security?
Of course not. These are not either/or alternatives. We've got to change
the structure of our entitlement system. We should fundamentally reform
our tax code—those who are at the top can afford to pay a few extra
percentage points in order to help pay for the sorts of investments we
need to make.

The cuts these days are being required
because of unwise tax decisions and misguided priorities. And also the
presumption that since we turned on the spigot for Wall Street, and now
we've turned it off for education, infrastructure, and environmental
protection. Those are unfortunate decisions.

Do
you think, considering the crises, we've seen that the no-holds-barred
libertarian model of economic policy is going to fall out of fashion?

You
know, I would have thought that three years ago. But—kind of
remarkably—it seems still to be holding on with great strength. If you
look at the Republican side of the House of Representatives, they are
voting to repeal critical pieces of Dodd/Frank, et cetera. So clearly,
the lesson that I thought would be learned has not been learned.

About the Author

Joe Fassler is a writer based in Brooklyn. His fiction has appeared in The Boston Review, and he regularly interviews authors for The Lit Show. In 2011, his reporting for TheAtlantic.com was a finalist for a James Beard Foundation Award in Journalism.

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